Natural Resource Economics Wednesday, January 11

Natural Resources Land Minerals – iron, quartz, potash Energy – petroleum, coal Water Forests Fisheries Biodiversity

Natural Resource Economics is about: Resource Adequacy Resource Scarcity Distinction between physical and economic scarcity

Economic Scarcity A resource is scarce if there is less available than would be demanded if its price were zero Scarcity is a function of demand as well as supply e.g. gasoline

Natural Resource Economics is about: The allocation of scarce resources across uses and users Space Criterion for allocation – static efficiency Time Criterion for allocation – dynamic efficiency

Natural resource economics is concerned with externalities Externalities shift costs Across space Across time When goods are non-exclusive or have high exclusion cost When goods are indivisible in consumption or non-rival When goods are congestible Externalities are ubiquitous

Natural resource economists focus on institutions Social devices that define the rights and obligations of participants in a decision process Produce incentives and disincentives that cause or resolve natural resource problems Assume they are endogenous to the analysis

Natural Resource Economics Recognizes that natural resources have extractive uses as inputs to production processes Recognizes that natural resources provide services in non-extractive uses e.g. recreation, scenic value, preservation of biodiversity

Natural Resource economists work with resource valuation Efficient allocation of a scarce resource between two competing uses requires that we know its value in each use Allocation issue may be between use and non-use -- allocation between time periods Using product and service markets to judge natural resource values is limiting

Natural Resource economists work with resource valuation Resources matter (have value) In extractive uses In non-extractive uses Assumption is that resources matter (have value) because people think they do

Natural Resources in Sustainable Development To what extent should natural resources be used to spur economic development? Will current resource use patterns seriously undermine other important aspects of the development process?

GDP Gross Domestic Product Natural Resource Use and Economic Development Economic well-being is measured by things like GDP, value of final goods and services. Growth of GDP implies economic growth and progress (development) If more cars are purchased, GDP increases

Limitations of Economic Accounting Increased production of cars to meet demand – stocks of ore, petroleum decline Increased consumption of cars – petroleum stocks decline Reductions in natural resource stocks are not reflected in GDP Understanding value of natural resources is key to refining accounting measures

What are the implications of mining for oil in a remote wilderness area? Should Great Lakes water be sold to Texas or California? How many fishers should be allowed access to a particular fishery and should their catches be limited? What difference does clean water make to the economic climate of a state or region? Should land be set aside as open space or for agriculture or for recreational uses?

Assignment for Wednesday, Jan. 19 Read “The Return of Malthus’ Ghost” (On ANGEL)